Canada's largest pension fund manager has become much more solid and flexible in the last few years, Sabia told reporters after a speech to the Quebec City Chamber of Commerce.

''Beginning two years ago we did a lot to strengthen the Caisse's foundations," he said. ''We have more agility and more flexibility."

''But if you're asking me whether the Caisse is immune to the extreme and difficult situations in the markets, my answer would be, that is impossible.''

The pension fund manager has restructured since losing 25 per cent of its assets in the global financial crisis in 2008, including billions of dollars in its purchase of asset-backed commercial paper.

Sabia was asked what impact the current economic meltdown might have on the Caisse's full-year results, which will come out in February.

''Obviously, the situation on the markets is excessively turbulent and we're currently using our agility to face those circumstances," he said. ''But, once again, the Caisse is not immune to the enormous turbulence in the markets.''

The Caisse manages funds for public and private pension and insurance plans. At the end of 2010, it held $151.7 billion in net assets.

As of last June 30, that figure stood at $157.9 billion.

But that was before the stock market began its August roller-coaster of ups and downs as fears intensified over the eurozone debt crisis and the slumping U.S. economy.

Sabia took aim at Europe's political leaders, saying they need to act soon — and decisively — to deal with the crisis.

''It's important that they make decisions — and quickly,'' he said.

''If it takes months and months'' to react, the Quebec economy could be adversely affected, he added, reflecting similar remarks over the last few days by federal Finance Minister Jim Flaherty.

But Sabia also expressed optimism, saying ''we're convinced that our companies can thrive in world markets."

''...We believe that the best way to help the Quebec economy is to help it expand globally. ... When a Quebec company invests abroad, it becomes stronger and Quebec becomes richer.''

And he said the Caisse will look at investments in infrastructure in developed and developing countries alike.

He cited an Organization for Economic Co-operation and Development study that predicts infrastructure investments worth 40,000 billion dollars globally over the next 20 years.

Sabia also said the Caisse wants to reduce the number of companies in which it invests.

Currently, the pension fund manager is involved with about 500 firms. ''Can we really have a deep understanding of each of these companies in which we've invested? The answer is simply, 'No.'

''We will concentrate our investments in fewer firms so that we can have a deeper analysis of each one.''

You can read Sabia's speech (in French) by clicking here. Quebec's French media also covered this event. Cyberpresse notes that the Caisse is going to revise its asset allocation in the months ahead and expand its lending to Quebec's small and medium sized enterprises. Les Affaires notes that the Caisse will be more active in private investments, particularly in real estate and infrastructure. Canoe notes that the Caisse is interested in the new project to beef up Montreal's Champlain bridge.

God knows Montreal's crumbling infrastructure needs to be revamped. Years of neglect, awarding sweet contracts to mafiosos who bribe city officials, have led to an infrastructure that is increasingly resembling that of a third world country. Bridges, overpasses and buildings are crumbling, killing people. This city is a joke, the traffic is horrendous, they're continuously "working" on the same goddamn streets every summer and they have nothing to show for it. We need the Germans to show us how it's done right.

Enough venting on Montreal's pathetic infrastructure (we still have the hottest women in North America!). Back to the Caisse and Sabia's comments. He's basically preparing everyone for what could turn out to be a terrible year. And he's right, the Caisse and other large public pension funds are not immune to market turbulence. The year isn't over yet, we might get a "beta thrust" in the last quarter, but Sabia is managing expectations.

Having worked at the Caisse on contract last year, I can attest that it has changed for the better but a lot more work needs to get done. These big shops have organizational issues, internal turf wars, and they're not doing enough to leverage the information they receive from all sources -- internal managers, external GPs, brokers, independent research, etc. -- and there are way too many egos in public and private markets.

Part of the problem at the Caisse is that Roland Lescure, the chief investment officer, is only responsible for public markets. This is simply unacceptable at a large pension fund like the Caisse. Jim Keohane at HOOPP, Neil Petroff at Ontario Teachers' and Mark Wiseman at CPPIB are responsible for both private and public markets. Neil told me that this has to be the case when you're budgeting risk across liquid and illiquid investment portfolios or else you're a "CIO with one hand tied behind your back." The Caisse's CIO should be responsible for all investment portfolios, not just public markets.

The other problem is that the Caisse still doesn't have a central research team that covers market risks in both public and private markets. They have competent people but the structure isn't in place yet. CPPIB has something in place but even that isn't up to my standards. If I were to consult these large pension funds, I'd tell them that a lot more work needs to be done to break down the public-private market silos and they need to get rid of all the egomaniacs who think they're above sharing information.

Basically these organizations need someone like me, a pitbull who doesn't take shit from anyone. I'll break down those silos fast and make sure the private and public market managers are on the same page. I'd ask all those guys and gals flying around the world attending hedge fund and private equity conferences, being wined and dined, to come back with good information, and not the crap that they hear at conferences. It's the stuff they hear from other pension fund managers, fund managers over dinner or drinks that truly counts. The rest is pretty much useless common knowledge.

Finally, while I think the Caisse can make money lending to small & medium sized enterprises (SMEs), it won't be easy in this environment. I noticed that OMERS too just created a $180 million venture capital fund, but that carries big risks. How do I know? I worked a couple of years at the Business Development Bank of Canada (BDC) and saw how tough it is to make money lending to SMEs and especially how tough it is to make money in venture capital in Canada. Most institutions have lost billions in VC in this country and yet we continue throwing money down the toilet. That's another scandal that I will expose one day.

The Caisse is better off following CalPERS and start seeding Canadian hedge funds. In particular, it should go back to developing Montreal's financial community which is truly pathetic. I don't want the Caisse to give more money to Montreal's established and rich managers; I want them to seed new, emerging managers who are performance driven and will create jobs. They can team up with others, use a managed account platform to manage risk properly, but they have to get to it and stop making excuses as to why they can't (it's all bogus politics and we know it).

In short, the Caisse and other large pension funds will likely experience a bad year (not surprisingly, Canadian pension funds got hit in Q3). The Caisse has come a long way since the $40 billion train wreck in 2008 but a lot more needs to get done. They have competent people but the organizational structure needs to be revamped and they need to take more intelligent, opportunistic risks both internally and with external investments. If they don't do this, they will suffer even worse losses in the future.

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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